This paper develops a system instrumental variable method to estimate the speed of adjustment coefficient in the long-run equilibrium of structural error correction models for a class of linear rational expectations models. This method is applied to an exchange rate model with sticky prices, in which the speed of adjustment coefficient governs the half-life of the real exchange rate. Compared to single equation methods, the system method gives smaller half-life estimates with sharper standard errors.
ASJC Scopus subject areas
- Economics and Econometrics